WEEKEND OBSERVATIONS

First, I am 25% short (QID, TZA, FAZ, SRS) and 8% long (MRGE). I am net short with a neutral-bearish bias. Once/If I get to the 50% short level, then I am "committed" to the dark short side.


I would like to note the New Highs-New Lows Index and the VIX. The ones below are for the NYSE and the NASDAQ. Do you see a problem on the chart? I do. We had the biggest rally (+30.5% so far) since the bear market started yet we can't get a noticeable uptick in new highs. This, among other things, tells me that the bear market is not over yet. There is no improvement here if we look at the 2-year picture.



The VIX is forming a bullish wedge and I am expecting a breakout to the upside or at least to the top of the wedge's channel. Obviously, this correlates with my bearish stance. The VIX also found support at the July 2008 high yesterday (Friday).


Now, the COMP, RUT, and SPX. All three have broken their uptrends. As the COMP was the first one to reach the 200-day, so shall it be the first to lead the decline, and it has. Some people say that the lack of volume has been an issue. If you noticed, we didn't get high bursts of volume in the beginning of any of the previous declines. We did get larger volume towards the end of the capitulation/exhaustion stages.

The most important market volume indicator is the COMP. Take a look at May 7th (red highlighted volume bar). This is the day that the COMP failed the 200-day MA, and it is also the biggest volume for the COMP in all of 2009. You may also notice that volume remained weak during previous declines. Price action should be your most important criteria when determining direction.


The RUT also has a pronounced breakdown, and it is very obvious. Currently flagging between 470-485, the RUT has the potential to reach the 50-day MA which should be above 450 in the coming days. There is major support at 470, so I do expect a lot of whipsaw on the daily.


Both indices are below both the 15- and 20-day SMA's, which is short-term bearish and serve as trend break confirmation.

Did you notice the "stick sandwich" 3-candle formations on the COMP and RUT? The textbook will tell you that it is a bullish pattern, but it is wrong. It's all about the location of it. The R-W-R (Red-White-Red) stick sandwich in my book is a continuation pattern to the downside (or if the candles were W-R-W, then bullish). If you need more examples of a stick sandwich, then let me know.

Finally, we come to the SPX, which is testing the 20-day. Of course, there is strong support at 875, a level which has acted as a barrier for months. So far, it is holding extremely well. The SPX's strength is the reason why I am not committed short. If we close below 875, then we could see a move to 840. We'll know if/when we get there.


As always, don't forget to exercise caution when shorting stocks.

CAPTURED: MOLESTA THE MAGNIFICENT (ASSHAT)

U.S. Marshals captured Molesta the Magnificent at approximately 11:32AM EST today.

He/she/"it" was seen walking between 58th & 3rd in New York City where marshals quickly apprehended him after robbing an individual only known as "S.B.".

Molesta is currently under quarantine at the NYC Metropolitan Detention Center due to an unknown new strain of "swine flu". The CDC has dubbed the new strain as the "Asshat Flu".

Developing...

MARKET COMMENTARY (5-14-09)

I am not sure what to expect today. We may continue trading in the approx. 884-898 range on the SPX, also within a secondary range between 880-905. I am currently 20% Short/15% Long/65% cash. Long positions are in ABCW, MRGE, and AHD and short positions are in QID, FAZ, SRS, and TZA.


As for the dollar stocks, some stocks still look good, so I may add them. Everything depends on today's action, primarily the close as I continue to rebalance the portfolio.

MARKET COMMENTARY (5-13-09)

The most pronounced breakdowns occurred in the COMP (-3%) and the RUT (-4.7%). Based on the charts, these are breakdowns and it is time to make preparations to short. I do not know for how long. The COMP resolved it's indecision at the 200-day by confirming a move to the downside. The RUT lost nearly 5%, bringing death to small caps.

A lot of people say that a trend does not change in one day. I disagree. I've seen many, many trends change in a single day via breakaway gaps. Whether yesterday's move was a breakaway or not is open for debate. We'll know soon enough. I do know that the bulls won't give up so soon.


I am currently looking for retracements to at least the bottom range of yesterday's opening gap bar and the first sign of failure to go short and to sell my remaining longs. It would be unwise to simply short whenever you want to just because the market broke down. Don't get caught short into a rally. As you can see, the market is still 30%+ above it's March low so it's not like you're late to the party.

WANTED: MOLESTA THE MAGNIFICENT

I am sorry to announce that the Amazing Dollar Stock Circus packed up and left town unexpectedly this morning, disappointing both kids and adults alike.

I should have fired Booze-O and Molesta the Magnificent 3 days ago.

The good news is, I already caught Booze-O (pictured below, right), red-handed, running out with my money this morning. However, Molesta (pictured below, left) escaped, and is wanted for grand larceny:


Molesta is considered to be armed and dangerous, not to mention, a pure shitbag.

The iBC Police Department is offering a reward of $100,000 for information leading directly to the arrest of Molesta. If you have any information concerning this fucking clown, please contact your local iBCPD field office immediately.

----

In other news, I took a -5% hit today. Not bad considering I had 17 long positions. I removed 7 of them in the morning, raised 60% cash, and gained 2% from scalping FAZ. MRGE, DVAX and ICAD held up well. I am expecting some sort of reactionary rally in response to the current -5% decline in the SPX in which case I will systematically remove more positions. I will also add shorts on said reactionary rally (if it is one). 2009 YTD gains now stand at +142%.

MARKET COMMENTARY (5-13-09)

I found another reason to play these dollar stock breakouts. MRGE saved my ass from taking a -5% hit yesterday. In fact, The 45% gains in MRGE mitigated the majority of my losses and I ended the day down only -1%. Whew! My strategy now is to keep buying imminent breakouts while weeding out half my long positions. My goal is to raise at least 50% cash. There are two reasons for this:

1) I manually looked through 400 charts, like I always do every night, and noticed significant (and shortable) breakdowns in many of the cheap names. This is telling me that the end is near. The dollar stock circus is gonna pack up it's bags and leave town.

2) I need to raise the cash to possibly buy FAZ, TZA, or TYP initially as a hedge, and possibly as full commitments if the next 2-3 days remain weak. As you can see in the 17-day chart of the SPX (below), we are pushing the limits of this pullback.


Current holdings: ABK, AHD, DVAX, EMKR, FLOW, GKK, HGSI, ICAD, MTSN, NNBR, PLLL, PWAV, SPRD, XTEX, MRGE, ABCW. BZ was sold yesterday for a +49% gain. I set my portfolio up with 5% allocations in mind for a reason. At this level, having large, concentrated positions is not smart. I can take a -20% hit and it will only amount to a -1% total loss. My MTD gains stand at 29%, so I can afford to make mistakes.

I will likely be buying and selling a lot of stocks today, cutting out the weeds and replacing them with some kind of vegetable seeds. Stay tuned.

MARKET COMMENTARY (5-12-09)

I currently hold 15 long positions, at around 5% per position, and an 25% cash position. They are as follows: MTSN, HGSI, BZ, FLOW, SPRD, PWAV, ABK, GKK, EMKR, ICAD, NNBR, DVAX, AHD, XTEX, and BEE. In total, I was up 4% today, solidifying my own breakout with YTD returns in excess of 155%. I sold only one position, TVL, for a 71% gain. Since I am considerably long at the moment, I will seriously make an attempt to not purchase any more stocks, at least for one day. However, if a setup looks really, really good, then I won't just sit there like an idiot and not buy. You know what I'm saying?


I've noticed several characteristics with these dollar menu stocks. First, they are obviously more profitable that higher priced stocks. You can make 20% in half an hour in many cases. Second, they are more fun to watch, especially when you buy before a breakout. It gives you a margin of safety and your gains act as a cushion for your portfolio. Third, they are amazingly resilient against adverse general market conditions. Normally on a a-2% down day on the SPX, most stocks should be down. However, most of my $1-3 stocks were either up or down just a few pennies. Why wouldn't anyone play these stocks?

The overall market is pulling back and we are in a multi-day process of consolidation. The COMP is still fighting at the 200-day MA, which the SPX, RUT, and DJIA have yet to reach. The only way the market can fully advance is if the COMP can breakout, and stay above the 200-day MA. The other indices remain within striking distance of the 200-day MA. Today's volume was low, which is indicative of a pullback and not some scary massive selloff.

Finally, I've literally gotten about one e-mail almost every5 minutes (no joke) from a whole bunch of traders. Many of you brought up some very interesting picks. I will review them all tonight. Don't forget to follow me on Twitter.

COMMON BREAKOUT PATTERNS (EDUCATIONAL)

BREAKOUT!

If you've been following me for the past 6 weeks, you know that I have called breakouts almost immediately before they do so. I was asked by dozens and dozens of people to provide some sort of educational post on what I lookout for. The primary patterns that make it on my imminent, potential, and waiting lists are as follows: 1) parabolic breakout+symmetrical triangle, 2) bull flag, 3) ascending triangle, 4) failed descending triangle, 5) rounded bottom, 6) flat base, 7) measured move.

Each pattern must utilize price action, volume, moving averages (15, 20, 50, 100, 200-day), and the development of the pattern itself. The entry point is marked when everything "lines up perfectly".

1) Parabolic Breakout and Symmetrical Triangle:


These patterns are the intra-day spikes that I covet dearly. They are responsible for many of the fastest and largest gains that I have ever achieved. This pattern utilizes 2 or more continuation or consolidation patterns to complete itself. They are usually flat bases, flags, and a variety of triangles. When the pattern goes parabolic intra-day, there will usually be massive profit taking and the entire move could retrace as much as 50%. Most weakhands would sell in panic when this occurs. However, this is wrong.

After a large move, the pattern needs to consolidate it's gains, shake out the weak holders, attract the dip buyers, and gather accumulation and interest for the next run up. Towards the end of the consolidating period, there will be another breakout, which marks a secondary entry to add another position.

Volume must be flat and declining prior to the spike, which will be accompanied by huge volume. In addition, the moving averages listed above will help guide you to time your entry. My favorite short-term averages are the 15- and 20-day MA's. 50- and 100-day MA's are intermediate averages, and the 200-day MA is the big daddy himself - the most important long-term MA.

Whenever you see a symmetrical triangle form after the initial spike, it is almost a guarantee that the particular stock will breakout again. Failures are rare, but they do happen.The point is to harvest as many of these patterns and cut losses on any of the failures.


2) Bull Flag:


Bull flags are usually very small and can last for only one day or several weeks. The way to tell the entry is by using the appropriate moving averages. Sometimes, I like to enter a flag regardless for fear that I may miss the breakout. However, the closer the pattern is to the 15- or 20-day, the faster the breakout will materialize.

3) Ascending Triangle:


The ascending triangle is one of the most obvious bullish patterns, and one that is highly reliable. Each trough is marked by selling exhaustion while the buyers hold their ground. You want to either get in on the breakout from the pattern or if you are more tolerant to risk, then enter within the pattern and just sit tight. Do not get shaken out.

4) Failed Descending Triangle:


Sometimes, when a pattern fails, it can be a good thing. A pattern failure will force holders on one side of a trade to immediately reconsider. A descending triangle is a bearish pattern but occasionally, it will fail. This will force short covering and a great time to add longs at the same time. I like to get in on the breakout on confirmation.

5) Rounded Bottom:


This pattern takes months, even years, to develop. The pattern is created by a downtrend, followed by a sideways neutral range. When the right side of this "saucer" develops, it will be obvious that the stock/market wants to go up. There should be a massive increase in volume on the breakouts following the final completing of the right side of the pattern. Shorts will cover their positions as they realize that they can no longer profit from the stock.

When the multi-month base is forming, the main moving averages should catch up to the stock. They should level off and start heading higher and support the stock as a "launching pad" for continuous breakouts.

6) Flat Base:


A flat base is basically an over extended flag trading in a neutral range on low volume. These patterns have one of the most powerful breakouts, ever. A stock can easily double in a matter of days/weeks. There should be no evidence of breakdown in this pattern and they should be entered immediately when you first find them. When the breakout occurs, it its highly likely that you never see pre-breakout prices for a long time.

7) Measured Move:


The measured move pattern is one of the most beautiful and predictable patterns. They easily launch from their supporting moving average. The best part is that several moving averages should provide support below the stock. They act as back up in case there is a failure.There should be decreasing volume during consolidation, followed by large volume breakouts.

I hope this helps.